Sweetwater Union High School District to be audited over potential fraud, state agency cites 'years of weak governance and leadership'

Kristen Taketa/The San Diego Union-Tribune

State fiscal officer Michelle Giacomini explains several financial management problems that her agency found with Sweetwater Union High School District at a Monday school board meeting. "You do have some budget solutions. They are still not enough," she told the board.

State fiscal officer Michelle Giacomini explains several financial management problems that her agency found with Sweetwater Union High School District at a Monday school board meeting. "You do have some budget solutions. They are still not enough," she told the board. (Kristen Taketa/The San Diego Union-Tribune)

The San Diego County Office of Education will order an audit of the Sweetwater Union High School District to find out whether the district committed financial fraud or misappropriation of funds.

The county office announced the action less than an hour after state officials gave a scathing report on the district’s financial management at a special board meeting Monday night. The officials said the district has for years misrepresented its finances and spent more money than it has.

They found problems with how Sweetwater has long handled budget development, cash borrowing, deficit spending, position control, data management and more. Sweetwater’s budget mishandling has been happening for so long that the budget solutions the district has introduced this fall will not be enough, said officials with the Fiscal Crisis and Management Assistance Team, the independent state agency that studied the district’s finances.

“Situations like yours are the manifestation of many years, many years of weak governance and leadership,” said Michael Fine, CEO of the fiscal state agency.

Some new findings that were revealed by the agency on Monday night include that:

• The district had 302 instances when it logged a false budget entry, Fine said. Fine gave the hypothetical example: if four schools each had one budget line for a staff member making $100,000, the total budget line for those four staff members would show up in the district’s books as only costing $300,000, a number that conveniently fits with the district’s bottom line, Fine said. “Those don’t show up by accident. Those are very intentional entries. Three hundred and two of them is what we discovered. That, my friends and colleagues, is a cover up,” Fine said, leading to several gasps from audience members.

• The district omitted four months of payroll last school year from its books, Fine said. “When payroll is zero and you have thousands of employees being paid, how can payroll be zero?” Fine said.

• The district has been borrowing money from a special tax fund called Mello-Roos, intended to pay for facilities, with “no apparent ability to pay it back,” Fine said. The district will have about $68 million in cash borrowing debt by June, which exceeds limits in state law, according to the state fiscal team. Fine noted that the trigger for a state takeover is when the district runs out of cash and ways to make payroll.

• The district has long been incorrectly calculating its state revenue, despite notices from multiple audits that it was not doing it properly. “That is problematic for so many reasons,” said Michelle Giacomini, the state management assistance team’s deputy executive officer, during Monday’s meeting.

• The district neglected to revise its local control accountability plan — its state-required plan that details how it will serve students and improve educational outcomes — after planning budget cuts this fall.

All told, the state fiscal team found that Sweetwater is worse off than any of the other school districts in the state that they have reviewed for fiscal risk this year, Giacomini said after Monday’s meeting. The agency gave the district a 57 percent risk rating. A rating of 40 percent or higher is considered to be high-risk, Fine said.

What’s worse, Fine said, is that the Sweetwater board on Monday evening had just given away a crucial tool it had to help correct its financial crisis — its ability to lay off employees.

That’s because the board approved an early retirement plan that will pay more than $18 million to about 300 employees to retire by the end of this school year. As part of the retirement deal with its unions, the district promised not to lay off any credentialed educators for the next school year. Staff make up about 90 percent of the district’s costs, Fine noted.

“It will be very difficult to solve all of this without touching people, and you have eliminated that as a tool at least for the next six months and, for your certificated staff, for a whole year,” Fine said.

Earlier on Monday before the board meeting, the San Diego County Office of Education had warned the Sweetwater board about the same issue with the early retirement plan, saying the plan was “fiscally irresponsible.”

However, minutes before Fine and Giacomini gave their presentation, the board voted unanimously to approve the retirement plan anyway, to some cheers in the audience. Public Agency Retirement Services, the group that helped Sweetwater formulate its early retirement plan, said it believes Sweetwater will generate net savings of $22 million over five years through the plan. Superintendent Karen Janney insisted that the district avoid layoffs to keep a positive relationship with unions.

The county office has argued that the district has had a high enough rate of natural attrition in recent years that the district could have probably achieved the same savings without the early retirement plan.

Regarding the county office’s decision to pursue an audit of Sweetwater, spokeswoman Music Watson said, “These actions are a safety net to protect students, the district, and the county office. We will not compromise SDCOE’s fiduciary responsibility — or the district’s — as we work to ensure Sweetwater’s students have what they need and deserve to succeed.”

After Monday’s board meeting, Janney declined to comment to a reporter on the state fiscal team’s findings.

During Monday’s meeting, district staff members said they were working on addressing the issues mentioned.

“We think we’re addressing some of them right now. We haven’t addressed all of them,” Janney said. “We know it’s serious. We have been addressing them and we will continue to address them.”

The state’s fiscal analysis of the district, which was conducted in October, was triggered after the San Diego County Office of Education disapproved the district’s budget in September. That month, district staff said it suddenly realized that it had overlooked a $4 million negative fund balance for the current school year and had to cut $20 million to make ends meet.

As of Monday before the board meeting, Sweetwater had estimated that it would need to make $42 million in budget reductions next school year and another $25 million more the following year.

Moving forward, Fine urged Sweetwater to cooperate with the county education office and listen to its new chief financial officer, Jenny Salkeld, who started working for the district in late August.